Employers of U.S. residents who are remaining in Europe while projects are shut down because of the COVID-19 pandemic might benefit from a new taxpayer-friendly approach. The new protocol forgives days spent abroad because of COVID-19 travel restrictions, as part of a foreign-country corporate residency analysis.

On March 23, 2020, the Irish Revenue Commissioners (Irish Revenue) issued Revenue eBrief No. 46/20, which announced Irish Revenue will adopt a taxpayer-friendly approach to corporate residency determinations for companies whose employees, directors, service providers, and/or agents are unable to travel as a result of recent government-imposed travel restrictions. This guidance came at the same time as similar announcements by the Organization for Economic Cooperation and Development (OECD) and several other countries. In particular, on May 20, 2020, and May 25, 2020, France and Germany, respectively, announced bilateral agreements with neighboring countries to ignore the presence of employees who must work outside of their country of employment due to government-imposed travel restrictions. Taken together, these policies suggest a universal willingness among international taxing authorities to quickly respond to the COVID-19 crisis and accommodate taxpayers as they navigate the evolving commercial realities of their businesses. …Continue Reading Working on a Production in Europe? Take Note of New Taxpayer-Friendly Residency Approaches in Light of the COVID-19 Crisis

With much of the entertainment industry currently at a standstill as a result of rampant production shutdowns, now may be a good time for those who are finding themselves idle to use this extra time to take stock of their financial situation and plan for the future. Economic factors, such as the current depressed financial markets and historically low interest rates, have combined to impact and drive a variety of estate planning techniques. While the current uncertain environment may – understandably – cause many to hesitate to engage in a substantial family gifting program, these economic conditions present a unique opportunity for families to pass a significant amount of wealth to younger generations with minimal transfer tax exposure. We recommend contacting your Venable Wealth Planning counsel to discuss the techniques that may provide the most viable opportunity for your particular circumstances.

For many entertainment businesses, the recent congressional stimulus has proved to be a smash hit. The IRS, however, is a tough critic and is looking to claw back some of that money by disallowing deductions associated with such stimulus funds. On April 30, 2020, the IRS released Notice 2020-32 (the Notice), which provides some clarity regarding the tax treatment of loans received pursuant to the Paycheck Protection Program (PPP). Specifically, the Notice clarifies that any expenses paid with proceeds from forgiven PPP loans are not deductible for federal tax purposes. In an earlier post, we raised the question of whether such a deduction would be allowed; now the IRS has answered, but it may not get the last word on this issue.…Continue Reading No Deductions (Yet) for Business Expenses Paid with Paycheck Protection Loans

The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) created the Paycheck Protection Program (PPP), pursuant to which certain taxpayers are eligible to obtain low-interest loans to enable continued operations during the coronavirus pandemic. If a taxpayer spends the PPP loan on certain enumerated expenses, including, among other things, payroll costs and rent, all or a substantial portion of the PPP loan will be forgiven. Participation in the PPP, however, has some critical tax impacts that should be considered. Below is a summary of some of such tax impacts:…Continue Reading Tax Impact of the Paycheck Protection Program

As the entertainment industry continues to adjust to a new normal, a largely forgotten provision of the Internal Revenue Code may provide welcome relief to both entertainment businesses and their employees during these uncertain times. The provision would allow individuals to receive tax-free payments from their employers while still giving employers the benefit of a deduction for such payments. The tax relief in question hearkens back to an earlier national crisis: following the September 11 terrorist attacks, Congress passed the Victims of Terrorism Tax Relief Act of 2001, which was intended to provide federal tax relief to victims of national disasters. Among the tax provisions to stem from this legislation was Internal Revenue Code Section 139 (Section 139).

Section 139 permits individuals to exclude from gross income for federal income tax purposes payments from any source (including an employer) that are qualified disaster relief payments. Qualified disaster relief payments include, among other things, payments and reimbursements for reasonable and necessary medical, personal, family, living, or funeral expenses that are incurred by an individual as a result of a qualified disaster[1] and not otherwise compensated (e.g., by insurance). Significantly, employers are able to deduct such payments for federal income tax purposes. Section 139 payments are also not subject to any federal withholding obligations and, therefore, do not need to be reported on a Form W-2 or 1099.

The Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provided the largest economic stimulus in American history in hopes of combating the economic effects of COVID-19. $349 billion was set aside for the Paycheck Protection Program (PPP), which provides loans, sometimes forgivable, to eligible small businesses. As we noted earlier, many production companies and other businesses in the entertainment industry will likely qualify to receive funds under the PPP.

But what if a company does not qualify for a PPP loan? For example, larger entities ultimately might be ineligible because of the 500-employee cap for eligible businesses. For these companies that cannot access PPP funds (or choose not to), the CARES Act provides alternative potential payroll tax relief.

The CARES Act creates a fully refundable payroll tax credit, the Employee Retention Credit (ERC), for eligible employers that do not receive a PPP loan. Companies entitled to an ERC will be able to use federal employment taxes, including withholdings, that such companies should have otherwise remitted to the IRS to fund “qualified wages” (defined below). Notably, if a company determines that its ERC will exceed qualified wages, it can request an advance of the credit from the Internal Revenue Service (IRS) through IRS Form 7200.

On March 27, Congress passed H.R. 748 – the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The entertainment industry, like the rest of the country, now eagerly awaits the coming aid. As production companies and other entities wade through the provisions of the bill to discover their share of the benefits, they might notice that some of the stimulus will arrive in the form of favorable changes to tax laws.

For example, one major piece of the CARES Act named the Paycheck Protection Program (the PPP) involves federally backed loans for qualifying “small” businesses that certify that the loan is necessary to support ongoing operations and will be used to retain workers and/or make defined overhead payments. The PPP further provides loan forgiveness for borrowed funds used to pay eight weeks of payroll and other qualified expenses. While businesses in the entertainment industry often do not conjure the words “small business” in our minds, many production companies, and other entities such as talent management firms, might ultimately qualify for these federally backed loans and subsequent forgiveness. For a deeper dive into the PPP provisions and who qualifies, see our earlier post.

Normally, debt forgiveness gives rise to taxable income. However, any loans forgiven through the PPP will be excluded from taxable income. Essentially, for a production company that qualifies, the federal government is not only offering free money to pay for certain expenses – it is offering tax-free money. It is unclear whether taxpayers can receive a double benefit by deducting expenses funded by a PPP forgiven loan. And, on a related note, states have not yet conformed to this exclusion, so the question remains whether any PPP debt forgiveness will give rise to taxable income in states such as California or New York. Production companies should stay tuned for the resolution of these issues.

UPDATE: As of April 16, 2020, the initial $349 billion in funds available through the PPP has been depleted, and the SBA is no longer accepting new applications. Discussions are currently in progress to inject additional capital into the program.

Additionally, some of the ambiguity surrounding payroll costs has also been cleared up by subsequent Treasury guidance. First, certain fringes, including group healthcare coverage and retirement benefits, are included in payroll costs. Furthermore, distributive shares from LLCs or S corporations and guaranteed payments from LLCs are included as payroll costs at the partnership level. It has been clarified that partners are not eligible to file for PPP loans as self-employed individuals.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”). The Act is a $2.2 trillion swiss army knife of economic relief provisions meant to reduce the impact of the COVID-19 pandemic on various parts of the U.S. economy. Among these provisions is the $349 billion Paycheck Protection Program (the “PPP”), an expansion of the Small Business Administration Economic Injury Disaster Loan program (the “SBA”). The purpose of the PPP is to help small and middle market businesses pay their employees and otherwise keep the lights on during the economic slowdown. As entertainment productions grind to a halt worldwide as a result of COVID-19, the PPP may be a welcome boon for entertainment businesses trying to stay afloat during this challenging time.

Before addressing the rules, it should be emphasized that taxpayers should file their PPP loan applications ASAP. It is anticipated that the $349 billion allocation to the PPP will be quickly absorbed and accounted for by applications submitted by this Friday (April 3), which means that applications filed next week may be out of luck unless Congress elects to expand the size of the PPP fund. With that as our background, we continue with a general description of the PPP.

As the coronavirus pandemic yells “Cut!” across the world, the entertainment industry will feel the economic impact, with theaters closing their doors, lower attendance at film festivals, delayed productions, and the like. Business managers and entertainment businesses, however, may feel some relief as Treasury called in sick and postponed Tax Day for 91 days. The news first broke via tweet on March 20, 2020, when Treasury Secretary Steven Mnuchin announced on Twitter that Tax Day will be moved from April 15 to July 15. A few hours later, the IRS fleshed out Mr. Mnuchin’s announcement by publishing Notice 2020-18, which provided more details regarding the taxes covered and the taxpayers affected by the new deadline. The move is one of several recent measures taken by the federal government as it attempts to relieve the immense economic strain being put on Americans by the COVID-19 pandemic.

This announcement comes just two days after—and supersedes—Notice 2020-17, which postponed until July 15 the payment but not the filing of federal income taxes and imposed limits of $1 million for individuals and $10 million for corporations with respect to such postponement. Notice 2020-18 restates and expands upon Notice 2020-17 by eliminating the distinction between payment and filing of taxes for purposes of the new deadline and by doing away with any pecuniary limits on the amount of tax that may be postponed.

As quickly as cameras flash at the Oscars, Congress passed the Tax Cuts and Jobs Act (“TCJA”) and left taxpayers holding the bag in some areas. Unlike in the movies, taxpayers cannot do a reshoot if the first take is not perfect. After almost two years, Congress may again pass additional legislation within a 48-hour period, which may resolve certain issues that have arisen in Hollywood since the TCJA.

On December 18, 2019, the House passed tax legislation as part of an omnibus package that included, among other things, extending Internal Revenue Code Section 181 (“Section 181”) retroactively from 2018 through 2020, which ultimately means that taxpayers may be able to elect Section 181 treatment for the 2019 and 2020 tax years. The Senate is expected to pass this legislation on December 19, 2019. Many taxpayers may wonder, “why do we need Section 181 if qualified U.S. film/TV productions (and live theatrical productions) already are eligible for bonus depreciation under the TCJA?”

For those who have already forgotten about Section 181, prior to the TCJA production companies were eligible to elect to deduct production expenses of certain qualified U.S. film/TV productions (and live theatrical productions) as and when incurred (subject to a $15m cap) in lieu of recovering such costs over a 10-year period. While Congress did not renew Section 181 beyond December 31, 2017, the TCJA included such qualified productions as property eligible for bonus depreciation.